Proposed changes to permitted development rights and use classes – impact on developers and landlords

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Two key themes of the Budget on 29 October 2018 were increasing the supply of housing and improving the health of high streets and town centres. Published with the Budget was the consultation ‘Planning reform: supporting the high street and increasing the delivery of new homes’. Also announced was the government’s ‘Open Doors’ project, aiming to help improve the vitality of town centres by facilitating meanwhile use of vacant units. The ‘Planning reform’ consultation closes on 14 January 2019. A call for applications from landlords who wish to pilot the Open Doors project closes on 31 December 2018. We have prepared a briefing for clients, summarising key proposals that will be of interest to retail landlords, developers and advisers and assessing how these might impact new or existing developments and the lettings of these assets.

Planning impacts

The ‘Planning reform’ consultation proposes changes to PD rights and the Use Classes Order. The mooted changes to PD rights include: proposals to permit change of use from specified retail uses to offices; for an additional category of retail use (Class A5, hot food takeaways) to change to residential use; and for existing temporary change of use PD rights to be expanded to include a range of community uses and extended from two to three years. Detail is also included on the upwards extension rights announced previously by the government to permit residential development over retail and other properties, including out-of-town retail and leisure. The proposed Use Classes Order changes expand the current Class A1, or enable switching between Classes A1, A2 and A3 without the need for planning permission.

There are various planning issues that respondents may wish to consider. PD rights limit opportunities for third parties to make representations on the direct and indirect impact of proposed development, as consultation is restricted only to those matters for which prior approval is required. This is good news for those wanting to take advantage of the wider rights; less so for others whose portfolios may be impacted. The same issue applies to the proposed changes to the Use Classes Order, as it will be easier to switch between certain Class A uses without planning permission and the associated consultation process. However, whether or not PD rights are the correct tool to solve the problems that the government is trying to tackle is questionable; if in order to ensure that development is appropriate, proportionate and sustainable the list of matters subject to prior approval grows too long, then effectively all that is permitted is the principle of the development; councils may also decide to limit the use of the PD rights through Article 4 directions. CIL could still be payable on the development permitted by the PD right and, in the event that the potential impacts of the proposed development trigger the requirement to undertake an environmental assessment (which is quite possible with some upwards extensions proposals), then the PD rights could not be exercised in any event.

Landlord and tenant impacts

The proposed changes to the Use Classes Order are potentially a key area of concern to landlords. Depending on how strictly “permitted use” is defined in the lease, if the change of use proposals are introduced as currently outlined then tenants could conceivably switch their use of premises from what is currently regarded as A1 (retail) to A3 (restaurant) without having to apply for landlord’s consent. A fairly fundamental change in use such as this could have a significant impact on tenant mix of the landlord’s asset, which is typically tightly controlled so as to maximise footfall and revenue. Any potential impact on rent review would also require careful specialist analysis. One way in which to future-proof against such proposals is to limit the tenant’s permitted use in the lease by reference to those use classes specified in the legislation as it currently stands. Similarly, restricting the nature of any “development” that the tenant can carry out so that this specifically excludes any changes of use would give landlords some comfort that their control will not be diluted by any subsequent legislative changes.

Business rates

The Open Doors project may be of interest as a way of mitigating business rates liability for landlords with vacant retail units that are proving difficult to re-let. However, the advantage of the availability of government funding through the scheme will need to be balanced against the loss of flexibility to let the unit during the 12 month period of community meanwhile use.

Please get in touch if you are interested in receiving a copy of our Client Briefing.

Authors: Fiona Sawyer, Professional Support Lawyer, Kate Wilson, Professional Support Lawyer and Frances Edwards, Senior Associate, Real Estate, London

Herbert Smith Freehills LLP is authorised and regulated by the Solicitors Regulation Authority.

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